Will LivingSocial help build a tech hub in DC?

Mayor Gray wants to expand a tax incentive, aimed at tech companies, to give LivingSocial up to $32.5 million in tax breaks over the next 5 years. The company threatened to move to Northern Virginia if it didn't get the tax break. Is it worth this money for DC to keep them?

Photo by Danny_Eugene on Flickr.

One major rationale for giving tax breaks to tech companies is to create a "tech hub," a concentration of jobs, talent, and investment that leads more potential tech workers, entrepreneurs, and investors to choose to move to, start companies in, and invest in DC.

The tax break requires LivingSocial to keep jobs in DC, but that's not enough to create a tech hub or any lasting value for DC. To be worthwhile, the tax break needs to push LivingSocial to create new, high-quality software engineering jobs in the District.

Just for comparison, $32.5 million is about the cost of modernizing an elementary school like Stuart-Hobson ($33.6 million). It's also roughly equivalent to the cuts Mayor Gray is proposing to the Housing Production Trust Fund, our best vehicle for promoting affordable housing ($38 million).

Before supporting the tax break, DC residents deserve to know specific benefits that these LivingSocial tax breaks will yield, and that they are more important than modernizing an elementary school or increasing the supply of affordable housing.

The proposed tax breaks reduce LivingSocial's property and income tax from 2015-2020 on a sliding scale based on number of DC residents employed. At least half of their employees must be DC residents for the tax breaks to kick in at all.

The vast majority of LivingSocial's employees are not engineers. Half of them work in sales and many work in transitional jobs writing copy for the deals.

These are good jobs, but they're not tech jobs, and don't contribute to a tech hub. The people who fill these jobs wouldn't necessarily work in technology firms after LivingSocial.

There are two unique things that LivingSocial or another tech company can bring to the District, and these essential elements are part of all successful tech hubs.

Smart money: The executives are good at innovation, and will start investing in other innovative companies if their company goes public or is acquired.

A deal that will benefit DC residents must be structured to retain smart money and smart engineers in DC.

Smart money, i.e. venture capital, is regional and is not confined to a particular county. So keeping LivingSocial execs who cash out and become venture capitalists in DC instead of Arlington doesn't seem worth paying $32.5 million for.

Smart engineers are another story. Most of LivingSocial's engineering openings are not in DC. Why not structure the tax breaks to target software engineers? Their presence in DC contributes to a larger tech cluster when they leave to work for other innovative tech companies.

The competition for smart engineers is intense in all tech hubs around the country. Even if LivingSocial, which currently loses hundreds of millions of dollars per year, doesn't find an exit strategy, DC would still benefit by the presence of hundreds of smart engineers looking to join innovative startups.

Apparently LivingSocial executives have told Deputy Mayor Hoskins and his staff that Virginia officials are courting them and that they are considering options such as Arlington. That shouldn't be a surprise. All corporate executives try to negotiate subsidies for jurisdictions where they have offices.

At the Tysons Corner software company I co-founded, we are frequently telling local officials where we have branch offices (Norman, OK and Charleston, SC) that we might move. We have received over $100,000 in subsidies over the past 3 years as a result.

But these cities only allow us to spend the subsidies we received on training for local employees in new positions that we add. That makes a lot of sense, because if we do leave, we will leave behind smart engineers who will go looking for jobs with similar companies.

Those jurisdictions are selling their locales based on value, not based on price. Such targeted incentives are what help build a cluster of related firms.

Reducing the corporate tax payments of a company that primarily hires salespersons and copywriters, on the other hand, doesn't appear targeted to yield any specific return. By comparison, spending that $32.5 million to modernize an elementary school or increase the supply of affordable housing feels like a more responsible choice.

DC councilmembers, who will consider the proposed LivingSocial tax breaks, should ensure that the tax incentives will actually help make DC a tech hub. Corporate subsidies and tax credits can benefit the District as long as the subsidies are vetted in a transparent, rigorous process that demonstrates specific benefits to DC residents. A tax break for LivingSocial could do that, but as it's structured right now, it wouldn't.

Ken Archer is CTO of a software firm in Tysons Corner. He commutes to Tysons by bus from his home in Georgetown, where he lives with his wife and son. Ken completed a Masters degree in Philosophy from The Catholic University of America.

Yes...provide the tax breaks. That's how it's done but get something in return besides their physical location remaining in DC. Even if LivingSocial may seem a shaky risk...at least place DC on the record as WANTING to keep companies in town.

I still can't figure out why Living Social and Groupon and the like are considered tech companies instead of simply sales marketing companies with a website and heavy social media presence. Are all companies post-2000 that interact with end-users solely through the internet now considered "tech?"

This is all true (particularly with respect to bringing vendors and venture capital into DC and getting better engineering education -- lord knows Hopkins can't carry the entire region), but this region is already a tech-hub. I think Gray is trying to foster a cultural shift from one of engineer drones at large corporate behemoths and government agencies, to a more entrepreneural, high-risk-high-reward spirit that characterize regions like New York and Silicon Valley, and he hopes the city will be the epicenter of that shift. And perhaps he hopes that this shift will not only bring in workers to do the jobs, but also all the other people who use and make a personal connection with those products and services.

I went to engineering school... I can say with confidence that competent engineers are a dime a dozen. But it takes a special type of engineer to have the spirit to get in on the ground floor of a startup. If people see that DC is a favorable incubator for startups, that will become an attractive alternative to the more stable lifestyle of government or contractor work.

In addition, most successful startups (LivingSocial included) are heavily diversified. They employ competent engineers, business managers, marketing and sales teams, legal counsel and so forth. In addition to competent engineers, it's important for the city to bring in everyone who supports them.

And as a side note, Ken... I must say it a bit ironic to focus so much on the importance of engineering talent seeing as you co-founded a software company having yourself a background in philosophy. More than most people, you know that a good idea and a couple of competent engineers will only take you so far on the road to success. :)

I agree with the article. I don't think DC needs to go crazy with the tax breaks; I'd rather see the business as a whole become more competitive.

@IsoTopor,

Would Google qualify as a tech company to you? Companies like LivingSocial still have data analytics components of their business and when coupled with creating applications, that would qualify as "tech" to most people. Software and data is where a lot of emphasis has been with smartphones becoming so popular anyway.

I am all for lowering tax rates to encourage businesses to locate here, but I can't seem to get too excited about an overvalued business that is nearly entirely propped-up by venture capital and that has yet to show an ability to earn profits and grow on its own. Didn't we already live through this about 15 years ago?

If the mayor wants to spend $32M on creating a tech center in DC, he should push for the infrastructure that makes entrepreneurship easier: shared work spaces; "hack the city" competitions and fairs; legalizing second units as office space (if not already allowed); providing limited grants; and the like.

More important, though, is how most of these policies effect all small businesses, from the start-up to the corner store. What DC needs is a culture of entrepreurship across the whole economy, and encouraging that will necessarily encourage tech start-ups.

I am all for lowering tax rates to encourage businesses to locate here, but I can't seem to get too excited about an overvalued business that is nearly entirely propped-up by venture capital and that has yet to show an ability to earn profits and grow on its own.

Most business do not earn profits or grow on their own for a number of years...some of them never make a profit. Many are propped up by bank loans and credit lines, funding from their friends and family and the like. If we only awarded tax deals to the most profitable businesses, then there wouldn't be much left other than Wal Marts, Apple Stores and McDonald's.

However, let's remember the context of what we are discussing. Our corporate tax rates are significantly higher than our neighbors. Virginia is on the prowl and is quick to hand out 10s or 100s of millions in tax breaks like candy on Halloween to anybody.

Sure, Google is definitely a tech company. Its revenue is nominally generated by advertising, but its method of generating that revenue is through software innovation, and its products are all what I would consider tech: Google search engine, Gmail, Chrome, Android, etc... These products are all developed in-house by software engineers.

On the other hand you have Living Social, whose revenue is generated through selling marketing services to other businesses. That's not a tech service. Nor is the method of its outreach or sales utilize in-house developed software to facilitate its business beyond what one would expect any advertising, marketing, or retail sales company to develop.

This is a conservative town (not politically, personality). Too many stiffs, not enough risk-takers. Start-ups won't work out here. People who are well-connected come here for work...people with skills and talent go to Silicon Valley.

Point 1: Living Social won't be around by 2020. I doubt they will last more than another 3 or 4 years as soon as they go public, the VC sell out their shares and LS goes the way of a thousand other revenueless bubble companies.

Point 2: I think it is highly hypocritical for some to go all scorched earth on things like tax subsidies for hotels (which cann't physically move and provide a healthy tax income (property/room/sales) to the city), but think it is ok for companies like these, whose employees aren't overwhelmingly DC residents, and the ones who are aren't exactly making the city rich by taxing their low ~37K a year jobs in "sales".

Google and Amazon have come out with services similar to Groupon and LivingSocial. There's clearly some overlap between the services that these coupon companies provide this technology/data revolution, and it's not trivial.

Using the term "technology" to describe an industry is pretty vague. You could say that LivingSocial is more of an e-commerce business, but you're selling these kinds of companies short if you neglect the fact that they used internet, social networking, and other technology to create a service that had disruptive effects on the status-quo as far as this industry is concerned.

And, this is all besides the point, anyway. We need to be encouraging start-ups in many areas. OPower is absolutely a tech company, but they do work in energy efficiency and have a lot of non-engineers. We need to do whatever we can to cultivate a culture of entrepreneurship and it doesn't have to be explicitly in tech. A lot of people in tech want to do other things as far as businesses go and vice versa with people without technical backgrounds but who have other skills needed to get partners and funding and build a business.

Its revenue is nominally generated by advertising, but its method of generating that revenue is through software innovation, and its products are all what I would consider tech: Google search engine, Gmail, Chrome, Android, etc...

Actually, its revenue is not "nominally" generated by advertising. Quite literally the opposite -- 99% of Google's revenues are generated from advertising. The revenue from Google's advertising products generate twice as much revenue as the world's next largest advertising conglomerate, Omnicom Group. Google leverages technology to generate revenue in the same way that LivingSocial does, and both companies are able to take revenue they generate and invest it in other products and services. And just as no one benefits from trying to pigeon-hole Google into being called an advertising conglomerate, no one benefits from trying to pigeon-hole LivingSocial into being called a marketing services company.

I can't imagine anything more important to the future of DC's swelling tech sector than ensuring it's biggest success stays in the city. Aside from the attention it brings our nascent community, the energy it's brought to the community of designers, developers, entrepreneurs and marketers can't be ignored.

Aside form that, i think this deal pays for itself. All those employees (whether they be Sales/Marketing or Engineering focused) all contribute heavily to the tax base of the city and add more revenue than they city would be giving up. Quick math:

1. Average Salary: $60,000
2. Average DC Tax @ 8%: $4,800 (let's make it easy and call it $5000)
3. Tax paid by LS employees per year at 1000 residents: $5,000,000

I know that's rough math but it's like 6 years of employment tax to get all of the corporate tax back.

I'm skeptical that DC can support a culture of technology entrepreneurialism. It would be nice if it could, but the people with that sort of mindset can easily get crowded out by would-be policy wonks, lawyers, 9-5 government employees, and government contractor engineers. It's just a matter of time before aggrieved citizens come to ANC meetings complaining of startup employees working at all hours and creating too much traffic and endangering children and whatnot.

It really sucks for DC/MD that VA is right across the Potomac River--the huge liberal/conservative, high tax/low tax, North/South divide. I don't think there are any other multi-state metropolitan area where there are two (or more) states with such vastly different politics and costs of doing business (at the state level). I definitely feel that businesses should pay their fair share, but its unfortunate when states (DC and MD) that require it are held hostage and extorted because of it. A big issue is that large businesses could generally care less about the better public services that the higher taxes pay for (which is the case in DC/MD/VA).

Most large corps. won't even consider relocating to DC for tax and space reasons and ver the last few years Maryland has lost Northrop Grumman and Hilton Worldwide to NoVa, both of whom decided to move into two randomly placed office towers in Tysons.

The latter company's move was especially troubling when you look at the fact that Mont. Co. has the hq's of Ritz-Carlton, Host Hotels, Marriott International, and Choice Hotels. All of the recent big business moves in Maryland have been lateral (within the state) including Choice Hotels move to a new highrise in Rockville, and Radio 1's relocation from Lanham to Silver Spring.

Baltimore, which doesn't have the state vs state issues has lost two of its Fortune 500 corps.--Constellation Energy and Black & Decker--because of buyouts (from Exelon and Stanley). This could be attributable to bad luck since the buyouts could just as easily have gone the other way.

In New York businesses won't get a free ride in NJ, CT, or NY. Not to mention the large cities in California. The only option in these cases is to move to a different part of the country (usually Atlanta or Texas). DC and MD's location really put them at a competitive disadvantage.

@Peter Corbett
That analysis assumes that absent Living Social that those 1,000 employees wouldn't be employed somewhere else. Also, I kind of doubt that the average salary of Living Social employees is $60,000.

[Deleted for violating the comment policy.]. If someone had a salary of $60k, they don't pay DC $5,000. They adjusted gross income would be lower based upon various standard or itemized deductions. So their AGI probably is more like $50,000. And due to the progressive nature of DC's income tax, you only pay $3,050 on an income of $50k. So that's about 40% less than you posited (based on an average salary that I still think is unrealisticaly high)

Also, DC doesn't get the capital gains tax unless those experiencing that gain live in DC.

I'm in business school at the moment and recently completed a course on startup development that had a lot of guest lectures from well known local VC's, startup CEO's etc. While I am still very skeptical of DC's potential for becoming a startup hub, the value prop I heard was as follows:

1. Because of the federal government, DC has one of the highest concentrations of IT professionals in the country, and thanks to those federal pay scales their salary requirements are much lower than in the Valley. (this is something we heard time and time again)
2. The environment is urban and vibrant enough to keep creative talent happy.
3. If your startup is enterprise software focused you probably have more potential clients here than anywhere else.
4. While the angel investor/VC ecosystem is smaller here, the flip side of that is it's a lot easier to get noticed. And there are new VC's setting up shop all the time.

From the tone of your comment and others I've seen, it's obvious that you're a Maryland booster basically, and that's fine, but some of the points you bring up don't make much sense. Why do Hilton and Northrop Grumman need to be in the same neighborhood as Marriott and Lockheed Martin? Is half an hour, in a major commercial area with a large presence of large companies, too far away? And on top of the state-level policies, there are other advantages that Northern Virginia had luring those companies. Public services are not vastly better, if not all, in Suburban Maryland, including PG, not just MoCo, and DC than Northern Virginia.

Maryland and Virginia both leach off of DC to an extent. Many of the companies that are in Maryland and Virginia are there due to proximity to DC. I don't think you should lump DC and Maryland together on this issue as if they have the same interests. Do you mind as much that DC lured CoStar's HQ away?

For decades, Suburban Maryland was more wealthy and developed than Northern Virginia and stuck its nose up and now it just sounds like bitterness because Northern Virginia has come into its own. Would you even care if the situation were flipped?

Why do Hilton and Northrop Grumman need to be in the same neighborhood as Marriott and Lockheed Martin?

Agglomeration economies. When companies that require similar skillsets from their workers locate near each other, they benefit from the fact that workers are more easily able to switch jobs. If a Marriott worker wants to change jobs, it's that much easier to switch to nearby Hilton because he/she is already accustomed to commuting to the area, etc. That 30 minute distance difference could mean a huge difference to people commuting to those offices.

Why do you think things like tech corridors exist? It's not because of some magical fairy dust in the soil.

I've heard a lot of those advantages before, and I agree with you that it's still an up-hill climb for DC.

The DC area would be helped a lot in this area if it had more and/or better research institutions. It's great that people come from all over the country to work and live here, so that helps dampen that a bit, but it'd be great if the city or immediate suburbs had a top-tier research institution around. I also don't think it helps that we lack a manufacturing presence in this area; even a small one would help.

I'd like to see more data on where the start-ups are located in the best US VC markets. I'm sure that if the area were to improve in this area, DC would benefit, but I think the suburbs would compete and benefit as well.

30 minutes may or may not be a big difference. Hospitality is not like finance, defense, or tech. The incremental benefits of hospitality companies being literally in the same office park are not as high as with other industries. There are a number of tech and industry clusters where competitors are located half and hour or so of one another, in the same market, and it's not the end of the world for them. Northern Virginia has more office space than Suburban Maryland for large corporations to set up a presence. There are other factors like proximity to airports and whatnot. These companies look at the entire picture.

Do you think Lockheed Martin better off in Rockville than in Northern Virginia near General Dynamics, the Pentagon, IT companies, and other defense contractors, some of whom are also half an hour away?

1. Average Salary: $60,000
2. Average DC Tax @ 8%: $4,800 (let's make it easy and call it $5000)
3. Tax paid by LS employees per year at 1000 residents: $5,000,000

As others have noted, a few adjustments need to be made to this calculation.

DOWNWARD ADJUSTMENTS
* Use effective tax rate which is lower than above stated marginal rate
* Use AGI which is lower than actual wages
* Not all employees are DC residents

UPWARD ADJUSTMENTS
* LS will have much more than an average of 1000 total employees between now and 2020 (they currently have 4900 employees)
* If LS goes public, there will be many millions in incentive stock options that will be cashed in, which will add to wages (and tax revenue) dramatically
* Most employees have non-wage income in the form of interest, dividends, capital gains, etc.

As others have noted, LS may never become profitable, greatly reducing the value of the tax breaks. The income tax breaks would be worthless and only the property tax break would be worth something.

The bottom line is that if LS were to actually move to VA, the loss in revenue would far outstrip the tax break. The question is how likely are they to actually do that. On one hand, DC has a lot of attractions for the young professionals that LS employs. On the other hand, that didn't stop Corporate Executive Board (which has a very similar employee demo to LS) from moving to Rosslyn.

1. Your primary assumption is that EVERY last LS employee is actually a resident of the District. We know it isn't true, and I doubt even a majority of their employees do. Anecdotally, I know 4 LS employees and they live in either Arlington or Alexandria. None are DC residents.

2. An Average salary of 60K? Hehehe...ok then. I don't have any proof other than anecdotal, but the 4 aforementioned employees are between 28-35. None of them make 60K a year and none of them started higher than 42K a year, and from what they tell me, that is pretty much what the vast army of marketing folk who consist of the bulk of the workforce make.

1. No, we're not assuming that all LS employees live in DC. Peter Corbett's model only assumed 1000 out of the current 4900 employees live in DC which seems like a pretty low assumption. Furthermore, the number of employees is growing by the day and the tax breaks have a requirement for the percentage of new employees to be DC residents.

2. The average also includes executives who make much more than 60K. Also, the starting salaries for sales employees of 28-35 is likely a base that doesn't include commission. That said, it's entirely possible that 60K is high but people have income other than wages (e.g., interest, dividends, capital gains, etc.) and if LS goes public, there will be a huge windfall in cap gains from stock options.

I'd be open to an alternative analysis but it seems like if LS, which is likely DC's largest for-profit employer, were to move to VA, the tax revenue loss would far outstrip the revenue loss. And, don't think it can't happen. When Corporate Executive Board left DC for Rosslyn, it was the largest for-profit employer in DC.

Great piece, thanks so much! The school and housing tradeoff is a good issue to highlight. I thought Arlington was very proud of not shelling out subsidies, at least not for real estate development. DC is probably better off competing by selling its desirability - with better schools, better housing choices -- rather than racing to offer more subsidies that a neighbor. Second, DC has run up an unbelievable bill in tax giveaways for real estate. And what about the Co-Star deal? In about 2010, DC hit its debt cap of $500 million for TIFs (tax increment financing) so the DC Council switched to giving away tax abatements to developers. In 2010, the Council enacted $166 million tax abatements for developers including some dramatic windfalls (see View 14). The council also put in place a law that said tax abatements needed to provide some information and be justified like TIFs. This might have dialed back the abatements to $62 million for 2011 (most of which was for the Adams Morgan hotel).

You keep looking at this as a loss/vs gain scenario.
Why is it a loss at all for DC if they move? Assuming they move to Arlington, the resideny of their workforce is going to remain practally the same, or are you thinking for some reason some LS employee who lives in U Street is going to move to Arlington because his office did?

Lets be generous and assume a full 50% of their DC workforce actually lives in the District. The overall general trend for employment in the District is that a full 2/3rd of all positions within the District are filled with residents of MD and VA, leaving 1/3rd for District residents...but we will ignore that and say half of their workforce lives here.

Anecdotally, I am going to say their average salary is 50K a year. This is on the high side based on the heavy "marketing specialist" side of their business, positions that start in the high 30's, but again I am being overly generous here.

Thats 25 million a year in taxable revenue, or approximately 2 million a year in collected tax reciepts.

The vast majority of LS employees aren't homeowners, so no property taxes to collect.

So I would say that it would cost the District about 2 million a year.

If and when LS actually makes a profit and pays some corporate income tax to DC, then maybe...just maybe but they considering the deep pockets of Groupon and the fact that they are losing half a billion a year just to keep the doors open, I won't buy it. LS is a poor investment.

Instead of throwing vast sums of money at every cupcake shop startup and "tech" wannabe that is far more likely to tank than survive, the District should be spending its millions attracting actual companies, with actual proven histories and earnings.

Companies like VW, Lockheed etc...that end up going to VA because they offers them money, and DC throws it away on profitless startups.

Fairfax County had to give VW a whopping 6 million dollars and they got 500 high earning corporate white collar residents, whatever corporate tax they pay and another 100 million dollars in construction the first year.

It is ludicrous to expect DC to give some unproven soon-to -be failure 32 million dollars when we won't give titans of industry who tally up tens of billions a year in earnings 6 million, or 12 million.

It is ludicrous to expect DC to give some unproven soon-to -be failure 32 million dollars

First, DC isn't giving away $32M. That's a ceiling. If LS doesn't make any profits, the income tax part of the abatement is worthless. Second, while I'm no fan of Gray, I'd guess that there's some kind of basis for the proposal and it's not "ludicrous".

1. What employer property tax? They rent all their space, most of it from the blogs hated Douglas Development. With the Districts vacancy at record lows, if LS decided to lease elsewhere, then their space would be backfilled without problems.

2. As I said, if and when they become a business that actually makes money, then we can remove all the stops and go after them to lure them back to the District. Putting 32 million on the table is an enormous "whatif".

3. You are talking like these are longtime high earners. "Investment income, cap gains etc...". Just how much do you think the average, single 28 year old making 44K a year makes in cap gains or stock gains in a given year? You are reaching for this one.

4. One of the 4 people I mentioned above was their 104th employee in the District. He was hired 18 months ago. His vestiture on his "shares" is spread out over 4 years and according to him everyone hired later (unless you are senior management). Based on prelim "Groupon" valuation, his shares are worth at most 70K, but it is spread out over a number of years of vesting. So sure, "if" they go public and "if" that employee is a DC resident and "if" he remains a DC resident during their entire vesting period then sure, there will be some one time money DC will lose out on. Even if they go public, it will be years and years before the employees can cash out all their bounty.

5. Considering how little LS employees are paid, I doubt more than a few percent of them are actual property owners and considering how often GGW and its contributers talks about the high rental prices as a functin of the incredibly tight rental market in DC, I doubt DC or its landlords are really going to have difficulty filling the space. If anything, they will look at the vacancy as yet another opportunity to raise the rent.

DC would be far better served spending that 32 million and locking up a Boeing or Bechtel, both of which are currently shopping locations, both have been in business for ~ 5 or 6 decades and ~20-30 billion a year respectively in work.

Well I question the long-term viability of the Living Social model for the following reasons. And this is coming from someone who buys restaurant and vacation deals from them all the time.

From the perspective of the travel agency or merchant arranging the deal they lose money. The purpose is to bring in customers who will continue to go to that restaurant or travel agency and pay full price. I bought a vacation from Living Social, but I'm not sure I'll go back to that agency to buy a full-priced trip. I'll probably just wait for another agency to run a deal on Living Social. There's no reason for me to go back to that agency.

When it comes to the restaurants I buy deals at, as I think about it, I'm not sure I'll go back to all of them to pay full price. I've gone back to one or two that I really, really liked. But I'm not necessarily going back to the other places.

So, if I'm running a travel agency or restaurant, does it really make sense for me to advertise on Living Social? Does the lost money from that promotion or deal or two necessarily mean people will come back? I'm not sure the economics of it works because Living Social will keep arranging deals with competitors. Thus the Living Social customer will just look for a deal to his/her liking from a competitor. I'm not sure that Living Social guarantees repeat business at a sufficient level to justify losing money by offering promotions through them.

I look at the fact that the company lost around $580 million last year. Maybe those are the costs a start-up inevitably incurs. But that has made me question the viability of the enterprise and whether it can truly become profitable.

I support giving them a tax break if the business is going to be viable long-term. If it's not viable then I'm not sure I would extend the tax break to them.

The legislation proposed buy the Mayor is titled " Social E-Commerce Job Creation Tax Incentive Act of 2012". it does not propose to be a high tech incentive package, but has the singular focus of retaining existing and future LivingSocial employment in DC.

A robust business retention strategy is critical to DC's future, and providing incentives to companies that meet the following criteria, on a selective basis, is critical to DC's fiscal future so that the city can fund its progressive social agenda.

The criteria are:
1. Growth companies
2. Entrepreneurial companies (as these are likely to spawn other entrepreneurial companies in DC)
3. Companies that will diversify the DC economy, particularly today when the federal government is likely to not grow and may shrink. The federal government is DC's primary employer and demand generator for a significant number of private sector jobs.
4. Companies with a good brand, particularly for hiring young people, who no not care about DC schools as much as those with children.
5. Companies with a high percentage of its employees living in DC. LivingSocial has over 50% of its employees, including its founder and CEO, living in DC; whereas, the typical DC business/organization has only 30%. If employees live here, their "garage" for their next start-up is likely to be in DC as well.

DC has NOT offered lots of incentives to operating businesses, but the ones it has offered incentives to fit the criteria listed above, including XM Satellite Radio, National Public Radio, Urban Institute (though they did not use the offered incentive), Co-Star, and, now, LivingSocial. Many of these incentive packages also entailed moving to an emerging office sub-market to help create a critical mass of activity in those neighborhoods.

Finally, an investment analysis shows this to be a prudent investment. The tax incentives do not kick in until late 2015, and only reach $32.5 million if LivingSocial employs and additional 1,500 people and 50% of all employees live in DC. And, if the full $32.5 million in tax abatements is received by LivingSocial, then there will be new tax revenues for the city of $160 million to $170 million, and an option on the capital gains taxes from a huge initial public offering and follow-on growth. Thus, if one believes that LivingSocial has a less than 20% probability of leaving DC, then one would probably not make this investment. But, if one believes that there is a 20% or greater probability that LivingSocial will leave and one assigns value to the upside from the capital gains of LivingSocial going public and becoming a large stable company and one believes there is value keeping and attracting entrepreneurs to DC, then this is an investment that makes a lot of sense.

DC is facing lots of competition from Maryland and Virginia to fully develop itself (Metrorail will open in Tyson's in the second half of 2013/first half of 2014 is just one of many examples). Assuming DC has an additional development capacity of 110 to 120 million SF, this new development could generate $800 million to $1 billion in additional tax revenue per year. To assure DC's attracting this development, it is worth investing in several key companies to make this happen. I would argue that it is in the city's interest to invest an additional $500 million in economic development investments over the next five years (public/private partnerships and commercial property and income tax rate reductions)to bring in $4 billion to $5 billion of new taxes over the ten years after the investments are completed. Please note that over this same time, the city will be investing hundreds of millions in affordable housing subsidies, construction and preservation.

In summary, the "Social E-Commerce job Creation Tax Incentive Act of 2012" is as valid a use of city money as affordable housing or other social development investments. Economic development investments should be made as part of an overall economic development strategy to grow DC employment and tax base, and must be prudently and transparently underwritten. Economic development and social development investments go hand in hand as economic development investments will generate the new tax dollars to fund the social developments.

Add a Comment

You can use some HTML, like <blockquote>quoting another comment</blockquote>, <i>italics</i>, and <a href="http://url_here">hyperlinks</a>. More here.

Your comment:

By submitting a comment, you agree to abide by our comment policy. Notify me of followup comments via email. (You can also subscribe without commenting.) Save my name and email address on this computer so I don't have to enter it next time, and so I don't have to answer the anti-spam map challenge question in the future.